18-05-2012, 04:22 PM
A Comparison of Financial Performance in the Banking Sector:
Some Evidence from Omani Commercial Banks
A Comparison of Financial Performance in the Banking Sector.pdf (Size: 220.24 KB / Downloads: 108)
Abstract
The purpose of this study is to classify the commercial banks in Oman in cohesive
categories on the basis of their financial characteristics revealed by the financial ratios. A
total of five Omani commercial banks with more than 260 branches were financially
analyzed, and simple regression was used to estimate the impact of asset management,
operational efficiency, and bank size on the financial performance of these banks. The
study found that the bank with higher total capital, deposits, credits, or total assets does not
always mean that has better profitability performance.
Key words: Commercial bank; operational efficiency; asset management
JEL classification: M12
Introduction
The banking sector is considered to be an important source of financing for most businesses. The
common assumption, which underpins much of the financial performance research and discussion, is
that increasing financial performance will lead to improved functions and activities of the
organizations. The subject of financial performance and research into its measurement is well advanced
within finance and management fields. It can be argued that there are three principal factors to improve
financial performance for financial institutions; the institution size, its asset management, and the
operational efficiency. To date, there has been little published studies to explore the impact of these
factors on the financial performance, especially the commercial banks.
This study proposes that there are measurable linkages among bank's size, asset management, the
operational efficiency, and the financial performance. The purpose of this study is to analyze the
financial data of Omani commercial banks for the financial periods 1999-2003. in addition, to examine
the relationships among measures such as bank's size, operational efficiency, asset management, return
on assets ( ROA), interest income, and to discuss their impact on the bank's performance. Financial
analysis is used to quantitatively examine the differences in performance among commercial banks in
Oman, and the banks are ranked based on their financial measures and performance for each bank.
Therefore, the objectives of this study are to classify the commercial banks in Oman on the basis of
their financial characteristics as a guide line for future development, and to assess their financial
performance. In order to evaluate the internal performance of a commercial bank, financial indicators
are constructed from the bank financial statements. Financial ratios like ROA, asset utilization, and
operational efficiency are calculated, Also, measures as assets size, and the interest income size are
used to assess the performance of a commercial bank. However, it is hypothesized for this study that
102 International Research Journal of Finance and Economics - Issue 3 (2006)
there exist positive correlations among return on assets, asset management, operational efficiency, bank
size, and the interest income size. In addition, there exist an impact of asset management, operational
efficiency, and the bank's size on the financial performance of the bank.Thus, this study is organized as
follows: the next section following the introduction discusses the relevant literature. The third section
defines the banking sector in Oman. Methodology of the study is described in fourth section. The fifth
section provides details of the results and analysis of the available data, and the final section presents
the main conclusions.
The Literature Review
Generally, the financial performance of banks and other financial institutions has been measured using
a combination of financial ratios analysis, benchmarking, measuring performance against budget or a
mix of these methodologies ( Avkiran, 1995 ). The financial statements of corporations in Oman that
published commonly contain a variety of financial ratios designed to give an indication of the
corporation's performance.
As it known in accounting literature, there are limitations associated with use of some financial
ratios. In this research, however, ROA ratio with interest income size are used to measure the
performance of Omani commercial banks. Asset management, the bank size, and operational efficiency
are used together to investigate the relationships among them and the financial performance.
Simply stated, much of the current bank performance literature describes the objective of financial
organizations as that of earning acceptable returns and minimizing the risks taken to earn this return (
Hempel G. Coleman, 1986 ). There is a generally accepted relationship between risk and return, that is,
the higher the risk the higher the expected return. Therefore, traditional measures of bank performance
have measured both risks and returns.
The increasing competition in the national and international banking markets, the change over
towards monetary unions and the new technological innovations herald major changes in banking
environment, and challenge all banks to make timely preparations in order to enter into new
competitive financial environment. ( Spathis, and Doumpos, 2002 ) investigated the effectiveness of
Greek banks based on their assets size. They used in their study a multi criteria methodology to classify
Greek banks according to the return and operation factors, and to show the differences of the banks
profitability and efficiency between small and large banks.
(Chien Ho, and Song Zhu, 2004 ) showed in their study that most previous studies concerning
company performance evaluation focus merely on operational efficiency and operational effectiveness
which might directly influence the survival of a company. By using an innovative two-stage data
envelopment analysis model in their study, the empirical result of this study is that a company with
better efficiency does not always mean that it has better effectiveness. A paper in the title of efficiency,
customer service and financing performance among Australian financial institutions ( Elizabeth
Duncan, and Elliott, 2004 ) showed that all financial performance measures as interest margin, return
on assets, and capital adequacy are positively correlated with customer service quality scores.
Generally, the concept of efficiency can be regarded as the relationship between outputs of a system
and the corresponding inputs used in their production. Within the financial efficiency literature,
efficiency is treated as a relative measure which reflects the deviations from maximum attainable
output for a given level of input ( English M. and Warng, 1992 ). However, there have been numerous
studies analyzed the efficiency of financial institutions.